The Rising Influence of Rising Affluence

[DewDiligence]

China Won't End U.S. Lumber Party

[Long term, China’s demand for US wood and wood products is bullish for PCL (#msg-70416781), but the current slowdown in wood exports to China (relative to 2011) has hurt the share price of PCL and other timber companies. This article says not to worry. Even in the short term, because the US housing market is showing signs of renewed health (#msg-75849750, #msg-72535180).]

http://online.wsj.com/article/SB10001424052702303395604577432601348890484.html

›May 29, 2012, 5:36 p.m. ET
By JUSTIN LAHART

Two forces are pulling America's timber industry in opposite directions. One is the nascent recovery in the U.S. housing market. The other is a drop in Chinese demand.

For the moment, the drop in Chinese demand is winning. But the moment may not last.

China has, until very recently, had an insatiable appetite for American wood. A booming construction industry needed to be fed, and the combination of export tariffs Russia slapped on in 2010 and a decline in U.S. timber prices following the housing bust made American logs and lumber a bargain.

U.S. exports of timber and saw-mill products to China came to $1.8 billion last year, from $1.1 billion in 2010 and $511 million in 2009, according to the Commerce Department. But this year, that demand is getting kicked away.

In the first quarter, these wood exports fell 16%. Figures for later months aren't yet available, but it appears the situation has deteriorated. In April, the Port of Tacoma—a major departure point for U.S. timber headed to China—saw 30,452 tons of logs leave its docks.

That was a third of the 92,270 tons shipped in April 2011.

Considering what's happening in China, it is understandable that investors haven't been all that enthusiastic about timber producers, despite the uptick in housing. Shares of timber real-estate investment trusts like Plum Creek and Potlatch have seen the gains they made early in the year whittled away. Similarly, forest-products REIT Weyerhaeuser has seen its stock price round-trip.

Given the speed with which China's economic growth seems to be slowing, one can't help but worry timber-company shares could be in for a rough time in the months ahead.

Beyond trade figures, data ranging from manufacturing activity to power output suggest China's situation is deteriorating, and executives at U.S. companies that do business in the country are showing signs of alarm.

But the [U.S.] housing market, if it continues to improve, could fill any hole, and then some, that China leaves. So far this year, housing starts have been running at an annual pace of about 714,000 versus 609,000 last year. Back of the envelope, that would be enough to make up for a halving in Chinese demand.

Indeed, to judge by what is happening to lumber prices, what's going on in the U.S. housing market is taking precedence over what is happening in China.

The latest weekly reading from lumber-industry newsletter Random Lengths shows that lumber prices are up 27% so far this year. Indeed, Chinese timber demand may have fallen not just because China's economy is slowing, but because U.S. wood is no longer the bargain that it once was.

If that is right, it may be framing up to be a better year for the timber business.‹